After American Apparel Inc (NYSEMKT:APP)’s June 18 termination of its founder, Dov Charney, in an issue related to “willful misconduct” which in part involves a sex harassment suit accusing Charney of making an employee his “sex slave,” the company has lost funding from a Charney supporter and is facing a cash crunch.

American Apparel

Lion Capital use removal of Charney by the American Apparel BoD as a clause

According to a report in the New York Post, UK-based Lion Capital used the removal of Charney by the American Apparel Inc (NYSEMKT:APP) board of directors to trigger a clause in the loan agreement that requires American Apparel to repay a $10 million loan. The Post is reporting that Lion Capital is “an investment firm that has been friendly to Charney.”

The $10 million default could trigger Capital One to call in its $30 million loan to the firm and push it into bankruptcy by creating a cascading flow of loan demands that could dry up liquidity for the firm.

American Apparel’s Charney accused of allowing the creation of a blog with naked pictures

Charney was embroiled in a scandal culminating in 2012 in which an employee, Irene Morales, accused Charney of forcing her to become a “sex slave.”  While the case was thrown out in 2013, more recently Charney was accused of allowing an American Apparel Inc (NYSEMKT:APP) employee to create a blog with naked pictures of Morales, according to the Post report.  It is on this basis that the firm’s board of directors released Charney from his duties.

For his part Lion Capital CEO Lyndon Lea was reported to have became frustrated in recent days after American Apparel Inc (NYSEMKT:APP)’s board appeared to stonewall him in response to questions about the internal investigation that spurred Charney’s dismissal, the Post reported.  The report also said Lion has been advised by its lawyers to temporarily forgo its right to take two board seats because of provisions triggered by Charney’s ouster.

There may be a silver lining to this story. While the firm is scrambling to find liquidity, its stock is up over 40 percent in the last two days and is potentially an acquisition target.